1. 1 Corporate Bankruptcy 101 Sponsored by New Jersey Corporate Counsel Association & Norris McLaughlin & Marcus, P.A.

2. 2 LOOK OUT! Economic Indicators Forecast a Rise in Bankruptcy Filings

3. 3 The Economic Indicators Unemployment, Interest Rates, Housing Market, Stock Market, Bad Credit-Card Debt

4. 4 The Economic Indicators Stock Market/Dow Jones –Oct 14 – 9,311 –YTD Change – (3,877) –YTD % Change – (29%)

5. 5 The Economic Indicators Unemployment Rate at 6.1% –Worst in 5 Years –760,000 year-to-date job losses –Job losses in retail, manufacturing, construction and leisure/hospitality –Job gains in government, education and health services

6. 6 The Economic Indicators Interest RatesOct 14Year Ago –Fed Fund Rate 1.50% 4.50% –WSJ Prime Rate 4.50% 7.75% Housing – Bad Credit-Card Debt –2008 – $40 Billion vs. 2009 – $95 Billion Budget Deficit at $454.8 billion

7. 7 Factors Leading to Financial Distress Liquidity Crisis Asset-Based Loan Default Loss of Major Client/Customer Loan Maturity and Unable to Refinance Drop in Revenue Increased Operating Costs

8. 8 The Chapters Of Bankruptcy Chapter 7 Chapter 9 Chapter 11 Chapter 13

9. 9 Recent Bankruptcy Filings Retail –Sharper Image –Goody’s Family Clothing –Mervyn’s –Linens ‘N Things –Lillian Vernon –Friedman’s Jewelers –Whitehall Jewelers –Boscov’s –Steve & Barry’s Distribution –Leiner Health Products –Mrs. Fields Cookies Real Estate/Finance –Lehman Bros. –Washington Mutual –WCI Communities –Home Banc Mortgage –American Home Mortgage Other –Jevic Transportation (Logistics) –Semgroup (Energy) –Skybus (Airline)

10. 10 Utilization of the Chapter 11 Process Reorganization Sale as a Going-Concern Orderly Liquidation

11. 11 Who Can File a Chapter 11 Businesses Corporations, Limited Liability Companies, Partnerships Individuals

12. 12 Commencement of a Chapter 11 Case Minimum Documents Necessary to File a Case: –Petition, Corporate Resolution, Creditor List, List of Twenty Largest Unsecured Creditors, and List of Equity Interest Holders Timing: –Minutes With the Advent of Electronic Filing

13. 13 Commencement of a Chapter 11 Case (Cont.) Notice to Creditors: –Twenty Largest Will Receive Notice Within a Day of the Commencement Date (If Emergent First-Day Hearings Are Requested) Other Creditors Will Receive Notice Within Approximately Two Weeks

14. 14 Commencement Of a Chapter 11 Case (Cont.) Effect of Filing: –Automatic Stay (Section 362 of the Bankruptcy Code) –Requirement for Court Approval of Any Action Outside of the Ordinary Course of Business –Jurisdiction of Court Over Debtor’s Assets

15. 15 The Players What is a Debtor-in-Possession? My company is losing money. I get to stay in control and keep collecting the same compensation. What more can I ask for? Yippee!

16. 16 Debtor’s Professionals Who are they? Counsel Special Counsel Chief Restructuring Officer Accountants Investment Bankers Environmental Engineers Brokers (real estate or business)

17. 17 Debtor’s Professionals How are they retained and how do they get paid? Retention Requirements Compensation (No such thing as a free lunch!)

18. 18 Types Of Creditors Banks (Pre-Petition Lenders) Equipment Lessors Landlords Trade Payables Taxing Authorities (Priority Claim) Priority Claims (Wages, Commissions, Benefits, including Union Claims) Equity Holders (Shareholders)

19. 19 Creditors’ Committee Formation Process Role of Committee Committee Professionals Compensation of Committee Professionals and Committee Members

20. 20 United States Trustee’s Office Role: Monitoring Chapter 11 Cases –Conducting Committee Formation Meeting –Conducting Meeting of Creditors –Professional Retention and Fee Application Oversight –Quarterly Fees

21. 21 First Day Motions “I filed Chapter 11 and I am now told I can’t pay anyone (including employees) until the Court says I can. What is the delay?”

22. 22 First Day Motions (Cont.) Use of Cash Collateral or Debtor-in- Possession Financing Payment of Wages and Other Employee Benefits Customer Refunds and Rebates Pre-Petition Critical Vendors Payment of Sales, Use and Other Taxes Maintaining Cash Management Systems Utility Companies

23. 23 First Day Motions (Cont.) Who is Served? How quickly does the Court hear the Motions? Can they be opposed? What is the likelihood of the Court denying the Debtor’s requested relief?

24. 24 DIP Financing vs. Cash Collateral What is Cash Collateral? What is DIP Financing? How are creditors affected by DIP Financing versus Cash Collateral?

25. 25 Types of Notices Mailed to Creditors Committee Formation Meeting Notice of the Section 341 Meeting Notice of Bar Date Along With a Proof of Claim Form Notice of Sale of Assets Notice of Settlements/Abandonment Notice of Professional Fee Application Hearings Notice of Disclosure Statement Hearing Notice of Plan Confirmation

26. 26 Executory Contracts An Executory Contract is a contract in which both parties still have continuing obligations. Examples: Residential or Commercial Leases, Certain Equipment Leases, Service Contracts, and License Agreements A non-Debtor party is required to continue with performance under the contract.

27. 27 Executory Contracts (Cont.) Assumption/Rejection of a Lease Motion to Compel Assumption or Rejection Bankruptcy Code provides Debtor with a 120- day period to decide to assume or reject a non-residential lease, which period can be extended for an additional 90 days thereafter and further if consented to by the landlord.

28. 28 Executory Contracts (Cont.) Equipment Leases Is it a True Lease vs. Disguised Security Financing? Does it matter?

29. 29 Executory Contracts (Cont.) License Agreements Intellectual Property Union Contracts

30. 30 Sale of Assets in a Chapter 11 Case

31. 31 Types of Sales Asset Sale vs. Stock Purchase Section 363 vs. Plan of Reorganization Higher and Better Offers Secured Creditor Sale/Foreclosure Sale

32. 32 Chapter 11 Bankruptcy Sale Process Retention of an Investment Banker/Business Broker Motion to Fix Bidding Procedures –Bidding Procedures Hearing –Standard Asset Purchase Agreement –Stalking Horse Agreement –Break-Up Fees –Minimum Bids/Overbid

33. 33 Impact of a Chapter 11 Sale Sale Free and Clear of All Liens, Claims and Encumbrances –Successor Liability Assumption and Assignment of Executory Contracts –Payment of Arrearages –Adequate Assurance of Future Performance

34. 34 Plan of Reorganization and Disclosure Statement Process

35. 35 Exclusivity The Debtor has the exclusive right to file a plan for a period of 120 days, which may be extended up to 18 months. Competing Plans – Plan filed by Creditors

36. 36 Plan Negotiations Treatment of Secured Creditor, who is primary lender to the Debtor Negotiations with Creditors’ Committee

37. 37 Plan Negotiations from Committee Stand-Point Is the Debtor viable? What would unsecured creditors receive in a liquidation? Are there claims against Insiders (leverage)? Are there claims against the Lenders, i.e. lender liability (leverage)? Are there avoidance claims against vendors?

38. 38 Plan of Reorganization Contents of Plan Classification of Claims Treatment of Claims

39. 39 Disclosure Statement Content: Similar to a Prospectus Provide Sufficient Information for a Reasonable Person to Vote on the Plan Notice of Disclosure Statement Hearing Objections to Disclosure Statement Approval of Disclosure Statement

40. 40 Requirements for Approval of Plan of Reorganization Consent of Impaired Classes of Creditors Fair Treatment of Creditors –Class of Creditors Must Receive More Than What They Would Receive in a Liquidation –Absolute Priority Rule -Junior Class of Creditors Cannot Receive Anything Until the Senior Class of Creditors is Paid in Full Unless Senior Class Consents –New Value –LaSalle – Is Equity Paying Fair Value to Retain Ownership? Feasibility Cram-Down

41. 41 Representation of Creditors

42. 42 In-House Monitoring of Chapter 11 Cases  Centralized Mailing Address for Bankruptcy Notices  Bankruptcy Department to File Proofs of Claim, Note Important Dates, and to Receive Any and All Bankruptcy-Related Documents  Outside Counsel  Forms and Letter Responses  Proof of Claim Form  Reclamation Demand Letter  Response to Preference “Dunning” Letters  Basic Knowledge of Preference Defenses  Bankruptcy Rights With Respect to Contracts with Debtor  Access to Pacer

43. 43 General Filing a Notice of Appearance Serve Reclamation Demand, if Applicable Adhere to the Deadline for Filing Proof of Claim Analyze Potential Preference Exposure Be Cognizant of the Debtor’s Viability and Continuing Operations Motion Objecting to Claims

44. 44 Reclamations  Administrative Claim – Automatic Administrative Claim for any goods received by the Debtor within 20 days prior to the Petition Date. –Bar Date for filing Administrative Claim –Motion to Compel Payment of Administrative Claim  Reclamation Demand - Within 20 days of the Petition Date, Creditor may serve demand on the Debtor for the return of goods received by the Debtor within 45 days prior to the Petition Date.  Defenses to Reclamation Demand –Subject goods no longer in possession of Debtor as of the Petition Date –Lender with a Lien on all Inventory, including subject goods

45. 45 Claims Process Bar Date (Deadline to File a Claim) Filing a Proof of Claim Motion Objecting to Claims

46. 46 Claims Trading What is it? Benefits of Selling Claim Risks of Selling Claim

47. 47 Personal Injury Claimants Automatic Stay Stops Litigation File Motion for Stay Relief to Seek Recovery from Insurance Carrier

48. 48 Landlords Debtor must assume or reject Non- Residential Lease within 240 days unless Landlord consents to further extension Debtor required to make all lease payments in accordance with lease terms

49. 49 Landlords (Cont.) Motion to Compel Assumption Relief From Stay to Terminate Lease Motion Seeking Adequate Protection Payments

50. 50 Landlords (Cont.) Assumption of Lease –Adequate Assurance of Future Performance –Cure of Any Arreages Assignment of Lease –Adequate Finances of Assignee –Shopping Center Leases

51. 51 Equipment Leases Equipment Financing True Lease vs. Disguised Security Interest Motion for Stay Relief Motion for Adequate Protection Assumption of Lease Sale of Equipment

52. 52 Preference Actions Adding Insult to Injury Preference Payments – Typically, any payment received within 90 days of the Petition Date Dunning Letter from Debtor or Liquidating Trustee’s Counsel Defenses –Contemporaneous Exchange –New Value –Ordinary Course of Business or financial affairs of the debtor and the transferee or made according to ordinary business terms

53. 53 Doing Business With a Debtor  Business Terms  Administrative Expense Claim  Emotions v. Profit

54. 54 Discussion and Q&A MORRIS S. BAUER, ESQ. 908-252-4345 | msbauer@nmmlaw.com LARRY K. LESNIK, ESQ. 908-252-4347 | lklesnik@nmmlaw.com BRUCE J. WISOTSKY, ESQ. 908-252-4347 | bjwisotsky@nmmlaw.com Norris McLaughlin & Marcus, P.A. Somerville, NJ www.acc.com/chapters/njcca njcca@comcast.net